Dump savings bonds for greater return?

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Dear Dr. Don,
My son received a few Series EE saving bonds at birth. They are nearing maturity, and the plan was to wait to redeem them. In light of the perceived dollar decline, plus the uncertainty of the Treasury being able to meet its obligations after the recent credit downgrade, would it be best to redeem them now?
— Lakshmi Longrun

Dear Lakshmi,
I think you should start out with valuing the savings bonds and checking on their current yields. I am a big fan of the Savings Bond Wizard available as a download on the TreasuryDirect website. Input the face value and purchase date of the savings bonds, and the tool will do all the number crunching. You may be pleasantly surprised at the yields bonds are currently earning, especially given today’s low interest-rate environment.

While the recent credit downgrade of the U.S. government is disconcerting, there is no need to alter your plans and rush to redeem these savings bonds. The government will make good on these securities.

Your outlook for the dollar may be correct, but over what horizon? Are we talking about the next few years or the next decade?

You didn’t say how much money is at risk in these savings bonds, but if you’re talking about just a few hundred dollars or even a few thousand dollars, redeeming the bonds to hedge against the risk of a falling dollar by reinvesting in foreign-denominated debt is hard to justify. Take a look at what these savings bonds are yielding now, and compare it to the yields you can earn in the foreign-denominated debt. No fair looking at Greek treasury securities with their double-digit yields.

For U.S.-based consumers, most, if not all, of their obligations are in dollars. Speculating on the dollar weakening so you have more dollars later to pay future obligations may work out, but you’re taking a risk that the dollar’s strength will work against you.

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